The life cycle of wealth management

One of the key skills of asset management is being able to understand the client’s specific needs and aspirations. As an individual’s circumstances change, so too should their investment strategies. The ability to fine tune financial advice to the client’s needs are vital to sound wealth management, as the investor goes through life’s stages.

“Our investment strategies and wealth management advice correlates directly with the age group of the client,” says Jean-Marc Fellay, deputy resident manager at Julius Baer Bank & Trust (Bahamas) Ltd. “The key factor is to understand the risk profile and time horizon of the client, then you can offer the correct investment advice, and this depends on what stage of life the client is in.”

Antoine Candiotti chief executive officer with Credit Agricole Suisse (Bahamas) Ltd agrees: “You have to consider what the customer’s objectives are, and this stands for any age group. For example, is the client accumulating retirement money, or looking to grow capital to make some acquisitions later on? Is the client willing to take a risk, or do they want to preserve their wealth for the next generation or even the one after that? In this case, the time horizon is much longer. The whole story is to balance all these elements and understand what the client needs.”

Exuberance of youth
One demographic that is currently expanding at an accelerated rate is that of the younger investor. A combination of new wealth being generated through youth-dominated industries, such as information technology and Internet businesses, and the fruition of succession plans for baby boomers reaching old age, has led to a rapid increase in the number of wealthy individuals in their twenties and thirties.

“Traditionally, our clients are high-net-worth individuals and ultra-high-net-worth individuals of generally middle to mature age–old money from the post World War II baby boomers,” says Fellay at the leading Swiss private banking group. “Many of them are reaching retirement age, in the succession planning phase, and are increasingly introducing their children and heirs to us.”

The ranks of younger investors banking with Julius Baer are also being swelled by a growing number of young entrepreneurs in emerging economies. “Younger and wealthy clients, high-net-worth entrepreneurs, such as you see in Russia and other emerging markets, are forming an increasing client group, especially in markets such as Asia. That is one of the factors behind why we have expanded in that market, which is now our second home market.”

According to Fellay, young investors are most interested in putting their money into eco-friendly and sustainable sectors such as renewable energy and green technology. They also tend to share an appetite for high-risk investments.

“Younger investors tend to be more aggressive and want high returns,” says Candiotti. “They also have time on their side.” Fast returns through leveraged assets or derivatives may be thrilling, but could also cost the client dearly. For young investors who have suddenly or recently come into a lot of money, the temptation of high-risk investments is great.

To help educate the younger investor, Julius Baer has introduced an educational programme for the children of its clients–the next generation of existing clients. “The programme is in the form of one-week seminars,” explains Fellay. The sessions focus on financial and management skills. “If the last crisis has taught us anything, it has shown us the limitation and shortcomings of certain structured products. You have to understand their fundamentals fully.”

Crédit Agricole private banking specialists advise their clients to be cautious in their investment strategies, favouring diversification and multi-layered investments, with only a certain percentage of their capital put into high-risk investments. It is also important to know when to stop.

“Discipline is very important in our business,” says Candiotti. “If you agree that you want to reach a certain level of return and you reach it, then you should lock it in. But it is often difficult to convince young investors to stick to this strategy. At some point they can become too ‘greedy’.”

Candiotti suggests that even young investors have to think about their long-term wealth preservation and perhaps allocate some assets to bonds or treasuries. They can be more aggressive, or even very aggressive on a small percentage of the portfolio, and this may be the part of the portfolio that could provide an enhanced return.

Mid-life responsibilities
As investors near middle age, the need for high return is often superseded by the need for steady income. “Usually, you have two things that happen. Firstly, retirement is getting closer, so people become more realistic about potential returns, as interest on capitalization will not accrue so much,” continues Candiotti.

“Secondly, other expenses start to come into play, such as your children’s higher education costs, and there is a bigger strain on the budget. The profile changes to look for a steady return. There will be less leverage and basically a smaller percentage of the portfolio will be very dynamic. This age group is more likely to look at blue chip defensive stocks that yield regular dividends, for instance utility companies, that tend to be more resilient even in the case of a global recession.”

But the requirements of middle-aged investors today, are different from those in the past. A result more of the age we live in than the age of the client perhaps, but middle-age investors are more tech savvy than previous generations, and have access to an enormous amount of real-time information. This has meant that asset managers have had to adapt their methods to suit the needs of a generation that is much more proactive in managing the way their money is invested.

“This age group values best advice and quality support, as opposed to just plain vanilla products,” says Fellay. “So, we have to offer an innovative open platform approach to market, across all asset classes, with no in-house product preferences. And they have to be best-in-class, because the investors are well educated, informed and financially smart.”

Golden years
With old age and retirement comes a diminished appetite for risk and an emphasis on wealth preservation. Retirement and wealth succession become priority, as investment horizons become shorter.

“It all depends on how much the clients have put aside and how much pension they have,” says Candiotti at Credit Agricole. “If they don’t have a big amount, then they should think of an insurance policy where they will receive a steady income for the rest of their life.”

If the client has significant wealth and is planning to pass it on to heirs, however, then the asset management strategy is often very similar to the profile of middle-aged investors, according to Candiotti, with a proportion of the portfolio allocated for dynamic capital growth, but the majority positioned for long-term stable returns.

“The key to successful investing is diversification and understanding the client’s expectations. It is not only about age, but also the amount of wealth available. If our client is 80 and he has $1 million for his retirement, then we would recommend to remain conservative in our investment proposals. But if the client has $50-$60 million, then he knows it will be unlikely he will spend it all during his retirement, and some will go to the next generation, then you can adopt a strategy of more diversification, with a percentage of the portfolio being more aggressive with a longer term horizon.”